Nearly three weeks removed from Russia's invasion of Ukraine, there's no denying the effect on global equity markets. The S&P 500 index has dropped 3% over the past month, with many stocks falling by much more.
The world's leading tobacco stock, Philip Morris International (PM +0.08%), has been hit hard, sinking 15% over the last month. But I believe the market sell-off has exaggerated the effect of recent developments in Europe on the stock. Let's discuss the reasons why I believe Philip Morris International is a solid pick for dividend growth investors.
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1. The business is chugging along
Philip Morris International reported its fourth-quarter earnings results for the year ended 2021 on Feb. 10. The company's adjusted net revenue and non-GAAP (adjusted) diluted earnings per share (EPS) growth were especially impressive for a large-cap stock with a market capitalization of $145 billion.
Philip Morris International recorded $31.7 billion in adjusted net revenue during 2021, which is equivalent to a 10.3% growth rate over the year-ago period. So, how was the company able to log healthy top-line growth?
Philip Morris International's cigarette volumes declined 0.6% year over year to 624.9 billion units in 2021. But this was more than offset by a 24.8% year-over-year surge in heated tobacco units (HTUs) to 95 billion during the year. This is the result of more cigarette smokers switching to the company's IQOS product. Of the 21.2 million smokers who have switched to IQOS to date, 15.3 million have stopped smoking altogether. All told, Philip Morris International's combined cigarette and HTU volumes rose 2.2% year over year to 719.9 billion in 2021.
Positive volumes and sales mix due to the sale of more HTUs accounted for the majority of Philip Morris International's total adjusted net revenue growth for the year. Favorable foreign currency translations, pricing, and acquisitions made up the remainder of the company's total net revenue growth in 2021.
Philip Morris International produced $6.08 in adjusted diluted EPS for the year, which works out to a 17.6% year-over-year growth rate. Aside from the higher adjusted net revenue base, the company's non-GAAP net margin expanded 70 basis points year over year to 28.7%. This explains how it was able to generate robust earnings growth.
Philip Morris International announced that it was suspending operations in Ukraine, including at a factory in Kharkiv, and has plans in place to restart operations once safe conditions allow. The company also announced that it has suspended its planned investments in the Russian Federation and plans to scale down its manufacturing operations in the country.
While the two countries comprised approximately 12% of Philip Morris International's total cigarette and HTU volumes in 2021, they contributed to less than 8% of the company's sales. That explains why analysts have only moderately reduced annual earnings growth estimates over the next five years, from 10% just last week to 8% as of now.
2. The market-crushing payout appears to be safe
Philip Morris International yields 5.3%, which is nearly quadruple the S&P 500's 1.4% dividend yield. While this incredible yield gives the initial impression of being unsustainable, that doesn't appear to be the case with the stock.
That's because Philip Morris International's dividend payout ratio was just 79.8% last year. This gives the company plenty of capital to take a balanced approach toward repaying debt, repurchasing shares, and executing acquisitions to help earnings move higher.
The next dividend increase that should be announced this September will probably be conservative to compensate for the headwinds occurring in Ukraine and Russia. But moving beyond this year, I expect mid- to upper-single-digit annual dividend growth from the stock. That's an attractive mix of immediate income and growth prospects.
3. An excellent stock at a discount
Philip Morris International's stock was already a decent buy prior to the correction, but I believe it's now a no-brainer buy for value investors and dividend growth investors.
For context, Philip Morris International's forward price-to-earnings earnings ratio of 13.3 is significantly lower than the industry average of 16.2. And it gets even better: Its 8% annual earnings growth outlook for the medium term is higher than the industry average of 7%. A dominant tobacco stock like Philip Morris International that has a superior growth profile to its peers should be trading at a premium to its industry, which is what makes it such a smoking deal.
